The Fed left rates unchanged today but there was a change in
the statement. It was very subtle and just enough to tilt the
scales but traders completely ignored it. Tuesday was governed
by several large program trades that caught the market by
surprise and left many shorts running for cover at the close.

Dow Chart

Nasdaq Chart

The day started off negative with the Retail Sales report and
a decline of -0.3%. Wal-Mart and Target held up the sector or
it would have been much worse. Back to school sales continued
to provide the majority of their gains. The 9/11 anniversary
did not really impact sales and life continued as normal. The
numbers were also boosted by heavy sales of building supplies
on the east coast in preparation for the hurricane. This
was the first negative week after three consecutive weeks of
gains. The Bank of Tokyo is now projecting gains for September
of only +3.5% to +4% which is down from their +5% earlier
estimate. It is going to be harder for retail sales to grow
over the next month because the tax checks are over and the
refinancing boom has bust. Consumers should be in conservation
mode for the holiday purchases in December.

The NAHB Housing Index fell to 68 in September from 71 in
August. This is a minor decline and 68 is still the second
highest number since early 2002. The outlook by the builders
may be eroding but it is still high. The components showed
that buyer traffic dropped to 20 from 55 and single family
sales dropped to 73 from 77. The only component that did not
drop was the six-month outlook which remained at 78 and the
same as the prior month. With the drop in buyer traffic from
55 to 20 I am amazed the headline number did not drop any
more. Builders are still hoping the rising economy will
offset rising rates and keep the momentum moving. They are
shifting their marketing to adjustable rate mortgages in an
attempt to diffuse the impact of the rate increase.

The Consumer Price Index rose only +0.3% for August and the
majority of that increase was due to energy prices. The core
rate showed only a +0.1% gain and emphasizes the lack of
pricing power for corporations and the potential for an
"unwelcome fall in inflation". The lack of inflation will
do nothing to prevent the Fed from taking stronger action
if needed to fuel the economy. The core rate at only +0.1%
was so low that it pushed the 12 month inflation rate down
to only +1.3%. This is the lowest rate since 1966. At only
+0.1% there is very little room before we start seeing
negative numbers and true signs of deflation. The economy
needs to put in a floor here, draw line in the sand or make
goal line stand. Choose your metaphor.

The FOMC meeting ended with no change in interest rates as
expected. The statement was a carbon copy of last months
statement with one small but important exception. Today's
release specifically said labor conditions were weakening
instead of labor conditions are mixed. Other than that
they repeated the same comments from the last two meetings
of risks are basically balanced between inflation and an
"unwelcome fall in inflation" but all things considered
there is still a minor risk of the latter. They still do
not trust us with the "D" word. Still the mere mention,
regardless of how minor, of the D phrase kept the bond
market to only a minor loss. The key point here is that
the Feds are either cautiously optimistic that the economy
is still recovering or they are still behind the curve or
they just have their heads buried in the sand. They did
realize that after seven months of jobs losses and
increasing jobless claims that the labor market was
weakening instead of mixed.

The Fed also issued the coded sentence that there were no
rate changes coming any time soon to keep the market from
worrying that any economic bounce could jumpstart the
rate hike cycle. This is critical considering the real
funds rate is already negative and has been for most of
the last 2 years. Also, this is one of the longest periods
of low rates over the last 50 years. The M2 money supply
has expanded more quickly in the last three year period
than any other period in history. Many analysts think the
"labor market weakening" statement was a clue that the
Fed could actually cut rates again if the Oct jobs report
was negative. The markets had a mixed reaction to the
announcement at first but then rallied strongly into the
close on a monster buy program. Conspiracy theorists were
flocking to the theory that the Fed was pumping money into
the market to make it appear the market was excited about
the Feds decision.

The Fed announcement was actually preempted by another
news event on the west coast. Two of the top three pension
funds in California with assets of nearly $300 billion in
stocks, called for the resignation of Richard Grasso and
a reduction in his announced pay package. They were quickly
followed the North Carolina Treasurer, claiming he represented
700,000 pensioners, and the New York State Controller who
claimed he represented 960,000 fund holders. This brings
to about a dozen the number of major players calling for
his resignation and in some cases the resignation of the
board. Now that the top players in the country have gone
on the offensive and pledged an aggressive fight using all
the methods at their disposal, Richard's days are numbered.
The reluctance to release details of the pay package until
pressed by authorities and then the bits and pieces release
already make the board and management look guilty. The
pressure is rising and although they did not do anything
legally wrong the appearance of abuse and cover up will
probably lead to a big announcement soon. Grasso has
refused all interview requests since the resignation
demands began to increase. Expect this to take center
stage on Wednesday right behind the hurricane.

After the bell MCHP affirmed a lower range of estimates for
earnings. Prior estimates were for sales to increase from
+1% to +6% and they narrowed the range to +2% to +5%.
Earnings were still expected to be 17 cents. Dell's CFO,
Kevin Rollins, was interviewed on CNBC and he was not as
upbeat as Michael Dell. He tried to carefully express both
caution and confidence without stepping on his boss's toes.
He said demand was stable but there was no real growth. He
also said they were seeing growth in performance but not
in price. The interviewer asked him specifically again if
that meant that revenue would not increase and Kevin tried
to dodge the bullet by repeating that they were seeing
growth in performance and launched a sales pitch for Dell.
Interesting interview where they actually discussed the
fact that Michael Dell may be more bullish about expectations
than facts would allow but it was very carefully worded.
I think Michael must hold training classes on how to speak
to the media to turn every interview into a sales pitch and
how to divert pointed questions.

The recall election is not off. At least according to the
ninth circuit court. Instead of waiting to see if the parties
to the recall suit would appeal the three judge ruling the
9th circuit gave the parties a limited amount of time to
file a 15 page position paper from which the court would
decide to take the case or pass. The court stayed the order
from the lower court halting the election and told everyone
to consider the election as back on until they ruled on the
appeal. The court can pass and open the door for a supreme
court appeal.

Spitzer is on the prowl again and they woke up the mutual
fund community today by filing not only civil charges but
criminal charges against Theodore Sihpol a broker for BAC
until he was fired last week. They are claiming that traders
"stole" money from fund holders by allowing late trading.
He faces up to 25 years in prison. Spitzer and colleagues
claim there will be many more charges against dozens if not
hundreds of fund personnel. The wake up call has caused some
real grief from people expecting a hand slap and a fine.
Real jail time on multiple charges with minimum sentencing
provisions will cause some sleepless nights tonight.

There will be more sleeplessness tonight for those that
were caught off guard by the strong rally today. There was
a strong move up at the open accompanied by a buy program
at 9:50. This produced some short covering that pushed the
Dow to strong resistance at 9500 where it traded sideways
in a ten point range until the Fed announcement. After the
announcement the Dow dropped only to the bottom of that
range and another buy program triggered to push the Dow
to the 9525 range where it held on strong but declining
volume for 30 minutes only to blast off on yet another
apparent buy program to 9560. When the 9525 buying began
the shorts began covering in earnest and pushed the Dow
and the Nasdaq to six day highs. Almost the entire drop
for the last six days since the September 8th closing high
was recovered in one day on negative news. There are quite
a few bears still short and scratching their heads tonight.
The S&P Emini came to a dead stop at 1028 with very strong
resistance at the 1030 level and the contract high. The
Dow closed at 9563 and only a very short 37 points away
from very strong resistance at 9600. 9607 was the recent
52-week high. The Nasdaq rallied +41 points and came to
rest only one point below the recent 52-week high. This
very bullish day completely surprised almost everyone.
However, if you look at the candles on the charts above
I am sure you will agree it was not normal buying patterns.

Let's reconstruct. Retail Sales declined and the Bank
of Tokyo lower their estimates for September. The core rate
of the CPI rose only +0.1% and could not get any closer to
an unwelcome fall in inflation. The NAHB Housing Index
showed buyer traffic fell to 20 from 55. The Fed said the
labor market was weakening and deflation was still a greater
threat than inflation. We are in the most dangerous six
weeks of the year. If all of this is bullish then I am
missing the boat. So what prompted the markets to retest
the current highs? What prompted the strong program buys
that triggered the massive short covering? Maybe I should
start believing the conspiracy theorists. It was certainly
not excitement that Grasso may be on his way out or that
Spitzer could file charges against hundreds of traders.

Ok, let's assume the economy is in a stealth recovery. We
are getting cautious comments from quite a few companies
that are affirming estimates but not specifically raising
them. Earnings warnings are very low on a historical basis.
We have analysts quoting +7% GDP for the 3Q with no evidence
to support it. Great, I hope we get it. The problem I see
that this is already priced into the market. Literally every
major analyst agrees with this concept. Also, almost all
analysts agree that a rally over the traditional Sept/Oct
period would be strongly bullish. Unfortunately nobody can
explain why it would happen. Nobody can explain why we are
not seeing any real profit taking.

The only scenario that makes sense is the new bull market
scenario. Scrap the concept of waiting for valuation because
stocks are always over valued at this stage of a market
cycle. Forget the normal historical market cycles because
they are only serving to produce dips to buy. Stocks are
going up because people want to buy them. They want them to
go up. After three years of a bear market they are tired of
the bearishness. They have bought the recovery scenario lock
stock and barrel. 2004 will be a banner year according to
the rising six month sentiment expectations. That is the
bullish view, buy the dip. The bearish view sees all the
negatives I mentioned above and keeps trying to short the
resistance. Been there, done that, today. Many are scared
of shorting the tops now because of the numerous breakouts.
They are waiting for the dips to gain speed and after 2-3
days of a downtrend they finally get suckered back into a
short position. Just as they get comfortable with the trend
the trend changes but just slow enough to keep them short
until the last minute.

We had five days of weakness on the Dow totaling about -220
points. No big deal but enough to make traders think that
Dow 9000 was possible again. This was especially true when
we were trading in the high 9300s last week. Shorts are like
that frog in a pan of cold water. Just as they are getting
comfortable and adding to their positions the price begins
to rise little by little but always with a hint of a continued
down trend. These represent the bearish equivalent of buying
opportunities or shorting opportunities. After a couple days
of sideways movement to lull them to sleep we got the big
morning bounce on bad news. Their fear factor rises but
surely this is temporary. We always get a sell off just
before the Fed announcement. What, no sell off? That is ok
we will see a monster sell the news event because the Fed
cannot say anything positive for fear of spooking the bond
market. The news is out, the market drops slightly and maybe
they add to their positions thinking the crash is about to
occur. Suddenly a massive buy program kicks the Dow up +60
points and their pain threshold increases exponentially.
Short covering begins on heavy volume but the majority are
still locked into that final lie. Don't worry the Dow will
fail again at 9600, Nasdaq 1890, S&P 1030. That was the prior
highs and very strong resistance. Shucks, I am going to
average down and add to my positions if we hit that level.

Replay that scenario every week for the last six months and
just change the economic reports and the prices and you will
see why we are threatening to break out again. All the
indications for the bear point to a failure in the economy,
a failure on price and a failure based on the calendar. None
of which has yet to come true. Most retail bulls are oblivious
to the complicated forces in the market. They have a winning
plan and they are following it carefully. Buy the dip. It
worked for years and it is back. Martha, take the funds out
of the money market we are going to make it all back. Actually
the Fed is supporting this plan. If they can keep talking the
market up and not scare anybody with the D word then investors
will feel prosperous again and they will spend money and pay
taxes with those profits. The only problem with this scenario
is that it will only work until it quits and nobody knows
when that will be. Eventually institutions will decide they
have ridden the bull long enough and start taking profits.

Actually, the activity over the last several days had looked
an awfully lot like some institutions were taking profits.
It looked like we were in a distribution phase. Distribution
occurs when institutions want to exit a large position
without tanking the market. If they think the market is near
a top they will start feeding each bounce with a fraction of
their position. Say they wanted to sell 20 million shares of
MSFT or GE. Just placing an order for 20 million shares would
knock us back to July in a heartbeat and they would end up
getting far less than current value. Instead they start
dumping smaller blocks of 5, 10, 20, 50,000 shares into the
market at a slow enough rate to keep the market from tanking
but fast enough to get them out as high as possible. By
distributing these multimillion share positions to the retail
investors in thousands of smaller chunks they get out quietly.

The signs of distribution are heavy volume and no movement.
This is exactly what we have been seeing over the last several
days. Today especially. There were several periods of huge
volume for a prolonged time with no movement. The bulls were
buying hard but somebody was feeding them in volume. The
bounce in the late afternoon was on very heavy volume and
it appeared as though the 9525 and 9550 pause levels were
particularly heavy. Of course this is all speculation on my
part because nobody knows what it powering the market. We
could have just been seeing some asset allocation programs
coupled with short covering triggered by those programs. The
key to the puzzle is still tomorrow.

Regardless of the reasons we did close at or near the highs.
If the gains today were based on program trades of some sort
then tomorrow could see a reversal. If it was really a flood
of new money into the market then tomorrow could see a break
to a new high once again. Shorts will be sitting with their
finger on the trigger at the open. They are in a very dangerous
position this close to a breakout. Let one major buy program
hit at the open and it could be off to the races. The economic
news tomorrow is light with only Residential Construction and
Mortgage Applications and the Semi Book-to-Bill after the close.
We are on our own for direction and the futures are perfectly
flat at 9:PM. It could be an exciting day if you are on the
right side of the market. It could be painful if you are on
the wrong side. The Nikkei rose +179 points at the open tonight
to break 11,000 for the first time in 14 months. This could be
our first clue. Dow 9600 is the key at the open. Once broken
the next stop could be 10,000. The key word there is "broken".